By Jamie McGeever

BRASILIA,itte hoshikatta dake no onee-san June 1 (Reuters) - Brazilian manufacturing shrank rapidly in May although not quite at the previous month's record pace, a survey of purchasing managers' activity showed on Monday, confirming that the sector remains in a state of near paralysis from the COVID-19 crisis.

The second consecutive month of heavy declines in activity, demand, new orders and employment suggests the wider economy will contract sharply in the April-June quarter, perhaps by the most on record.

The IHS Markit headline Brazil manufacturing purchasing managers index (PMI) came in at 38.3 in May, up from 36.0 in April which was the lowest reading since it was launched in early 2006.

A reading above 50.0 marks expansion in the sector, while a reading below signifies contraction.

"Although easing since the previous month, rates of contraction in output and new work were again severe, meaning manufacturers remained firmly in retrenchment mode with job losses mounting and purchasing activity cut a new survey-record rate," said Paul Smith, Economics Director at IHS Markit.

Latin America's largest economy is expected to shrink by more than 6% this year, according to the consensus forecast in a Reuters poll. That would be the steepest annual downturn since records began in 1900.

Figures on Friday showed that the economy shrank by 1.5% in the first quarter of the year. Industrial output fell 1.4%, the biggest decline since the October-December period in 2016.

Among the notable sub-index PMI readings for May, the employment index only inched up to 39.1 from 39.0, which was the lowest in almost four years. It was the third month in a row that employment in the sector had been cut.

The record low exchange rate kept the dollar-denominated cost of goods elevated, lifting the prices paid index to 65.7, the second highest since 2018. (Reporting by Jamie McGeever Editing by Chizu Nomiyama)

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